Justified multiples (derived from the Gordon model)
Algebraically rearranges the Gordon growth model to derive the P/E and P/B a company's fundamentals justify from its retention rate, ROE, growth and cost of equity, then multiplies by current fundamentals.
- Guide level
- Practical
- Output
- Relative valuation
Core formula
Justified P/E = (1 − b)(1 + g) / (r − g); Justified P/B = (ROE − g) / (r − g)How to interpret it
Algebraically rearranges the Gordon growth model to derive the P/E and P/B a company's fundamentals justify from its retention rate, ROE, growth and cost of equity, then multiplies by current fundamentals.
The output should be read as a scenario or decision aid, not as a guaranteed price target. Compare it with at least one method based on different economic assumptions.
Practical workflow
- Normalize the latest public financial and operating data.
- Choose assumptions that match the company's economics and accounting structure.
- Calculate conservative, base and optimistic cases where the method permits.
- Compare the result with market pricing and an independent valuation method.
- Document the assumptions that drive the largest changes in value.
Key limitation
Inherits the single perpetual-growth assumption and is highly sensitive to the r − g spread.
How Stockinsky uses it
Stockinsky uses this framework only when the company type and available data support it. Professional valuations expose assumptions, sources and warnings instead of presenting false precision.